- Explain why market share matters for understanding competition in an industry.
- Calculate a concentration ratio (CRn) and the Herfindahl–Hirschman Index (HHI) from market-share data.
- Classify an industry as competitive, moderately concentrated or highly concentrated, and relate this to industry types (perfect competition, oligopoly, duopoly, monopoly).
- Interpret a worked example based on the global drone-producer market.
1. Introduction & objectives
It is tempting to assume that the more competitors there are in an industry, the tougher the competition will be. This is not always true: it depends on how concentrated the competitors’ market shares are.
On the contrary, in case a firm is interested in entering an industry, less concentrated industries, where many firms compete for small shares of the market, might present fewer challenges to enter than a concentrated industry. This will depend on the entry barriers presented in Tool 2.
Market share represents the proportion of total sales a company achieves within a particular industry over a specified period, typically one year. It indicates a company’s relative size within that industry, and analysing market shares provides valuable insight into the competitive dynamics an industry’s companies face.
Concentration also matters beyond understanding competitor behaviour: regulators use the level of concentration of an industry to decide how to react to a proposed merger or acquisition. Industries are typically allocated to one of three broad categories — non-concentrated, moderately concentrated and highly concentrated — which indicate the need for proactive regulatory action, because higher concentration can lead to monopolistic industries. Monopolies can lead to higher prices and lower product variety, both of which lower consumer welfare.
2. The parts of the tool
2.1 · Data required
To calculate market shares, revenues generated by companies over a specific period (usually one year) are normally collected, for example from specialist databases such as Osiris. Revenue is not always the best measure, though: for online search engines, market share might instead be measured by counting how many people visit each site.
Before starting the analysis, it is important to identify the competitors correctly: is the competition global, international, national, regional or local? This depends on the industry — for example, drone producers compete globally, whereas drone-based services are mostly local or regional.
2.2 · Method: concentration ratio & the Herfindahl–Hirschman Index
- n-firm concentration ratio (CRn): the sum of the largest n market shares in an industry. CR4 is the sum of the four largest market shares; CR6 is the sum of the six largest. The higher the ratio, the more concentrated the industry, because a smaller number of firms control a larger share of the market.
- Herfindahl–Hirschman Index (HHI): an alternative index, calculated as H = Σ xi², where xi is the market share of firm i, and N is the number of firms in the industry.
A dedicated template has been developed within ICAERUS for calculating the concentration ratio and the Herfindahl–Hirschman Index.
2.3 · Interpreting the results
According to the Antitrust Division of the US Department of Justice, a market with an H index lower than 0.1 is considered competitive; between 0.1 and 0.18 it is moderately concentrated; and above 0.18 it is highly concentrated.
The table below (adapted from Besanko et al., 2013 and Grant, 2016) links the H index to industry type:
| H index / industry type | Key characteristics |
|---|---|
| Typically < 0.2 Perfect competition (many firms) | Strong competition, no entry barriers, scarce product differentiation (commodity market), good information flow. |
| 0.2–0.6 Oligopoly (few firms) | Rivalry strong or weak depending on the firms; considerable entry/exit barriers; possible product differentiation; scarce information flow. |
| 0.2–0.6 Duopoly (2 firms) | Rivalry strong or weak depending on the two players; considerable entry/exit barriers; possible product differentiation; scarce information flow. |
| > 0.6 Monopoly (1 firm) | Weak competition (but possible threat of entrants); high entry barriers; possible product differentiation; scarce information flow. |
Monopoly: a single company operates with weak or no competition; the cumulative market shares of the remaining companies would be less than 40% (Besanko et al., 2013). A monopolist can set prices to maximise value capture, which can mean less customer choice and higher prices.
Oligopoly: a few firms compete in an industry with significant barriers to entry; firms monitor each other closely and their activities are ‘interdependent’.
Duopoly: a special case of oligopoly with just two firms, which can collude on quantities or prices, benefiting from higher prices paid by customers who have little alternative.
Perfect competition: many firms offer homogeneous products, information is freely available and entry is easy; profits tend towards the minimum needed to survive. It is a theoretical ideal that real industries may only tend towards.
3. Example of application
As an example, the table below shows the market shares of global drone producers in 2024 (Statista, 2024):
| Company | Market share (%) |
|---|---|
| DJI | 76 |
| Autel | 6 |
| Other | 4 |
| Yuneec | 4 |
| Parrot | 4 |
| CARRERA | 3 |
| Holy Stone | 3 |
The seven companies producing drones are listed in order of market share, from largest to smallest: this ordering matters for calculating the concentration ratio correctly.
The CR4 shown by the tool is 90%, meaning the first four players own most of the market. This is confirmed by the H index, which is almost 0.6 — denoting a highly concentrated, near-monopolistic market. This is unsurprising given DJI’s market share of 76%.
Using the drone-producer data above, what would happen to the CR4 and the H index if Autel and Parrot merged? Would this merger likely attract regulatory scrutiny?
References
Antitrust Division | Herfindahl-Hirschman Index. (2015, June 25). https://www.justice.gov/atr/herfindahl-hirschman-index
Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2013). Economics of strategy (6th edition). Wiley.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases (Ninth edition). Wiley.
Statista. (2024, June 28). Market share of leading drone vendors worldwide in 2023 [Graph]. Statista. https://www.statista.com/forecasts/1490315/market-share-drone-vendors-worldwide
